What does the current debate on VAT in Czechia mean for consumers?

Finance Minister Zbyňek Stanjura (ODS) is facing strong resistance to his plan to change the value-added tax (VAT) rates, which would result in an increase in prices for many goods and services. An early version of the plan was presented on Monday by Czech Television (ČT). Prime Minister Petr Fiala says that the proposal is far from final and the actual proposal should be ready next month. Still, people both in and out of government had a lot to say about the draft plan.

Opposition to the proposal comes from not only from the general public and the opposition parties but also parties within Fiala’s cabinet.

Stanjura's plan would reduce the number of VAT rates from three to two. Instead of the current rates of 10 percent, 15 percent, and 21 percent, there would only be 14 percent and 21 percent.

Goods and services such as water, sewage, heat, draft beer, accommodation, entertainment tickets, and repairs of shoes and bicycles would be moved from the 10 percent rate to the 21 percent rate.

Medicines, public transport, food services, books, newspapers, magazines, and gluten-free products would be moved from the 10 percent rate to the 14 percent rate. The VAT on food, non-alcoholic beverages, medical devices, construction work, and children's car seats would drop from 15 to 14 percent.

TOP 09 vice chairman Jan Jakob was among the people most positive about the proposal. He said his party agreed with two rates in principle. “We want to discuss both the setting of rates and the distribution of specific items between these rates,” he added. TOP 09 is a member of the SPOLU group of parties that is part of Fiala’s coalition cabinet.

Mayors and Independents (STAN) and the Christian Democrats (KDU-ČSL), which are both part of the government coalition, want to maintain three VAT rates.

The Pirates, also part of the government, are against the higher VAT rate for goods and services such as water, sewage, heat, and accommodation. Both the Pirate party and STAN say the proposed changes would burden low-income residents and households, including students.

“At the same time, we will face any threat to the availability of necessary things such as medicines,” he added.

The KDU-ČSL proposes reducing the VAT on basic foods from 15 percent to 10 percent, which would make food significantly cheaper for people. “We do not believe that a change consisting in the unification of two reduced rates into one will bring about the desired stabilization of the state budget without harming our citizens,” KDU-ČSL economist Michael Kohajda said.

Under Stanjura's plan, the VAT rate for food would only drop by 1 percentage point to 14 percent. This wouldn’t mean much to consumers and would mainly benefit retailers while causing a loss in tax revenues for the state budget, Kohajda added.

Babiš’s party ANO, which is now in opposition, also is against the VAT changes. Former Finance Minister Alena Schillerová said it would support inflation and harm the budgets of the most vulnerable while the country is also seeing a drop in real wages.

Experts outside of politics also had views on the proposal. Economist Jan Švejnar, co-founder and chairman of the management and supervisory committee of CERGE-EI, said that the government should focus more on reducing spending than on raising taxes.

“If we have to raise taxes, then we need to raise them where they have either a neutral or positive impact,” he said, adding that raising real estate taxes could cause more properties to be rented out rather than sit empty as an investment.

Lukáš Kovanda, chief economist of Trinity Bank, said the planned changes to VAT are actually a tax increase that runs contrary to the original promises of the government. “The government ‘hides’ behind retailers because VAT is an indirect tax. People will often blame the retailer for the supposed increase in price, and not the government, which will be the real cause of the increase,” he said.

Vladimir Pikora, chief economist of financial group CFG, called the proposal, labeled as a way to simplify VAT, “pure nonsense.” “If someone wanted to simplify the system, they would introduce only one VAT rate,” he said.

He suggested reducing the number of civil servants and also cutting the number of subsidies given out by the state. “Tax increases will fuel inflation at a time when it is still very high,” he said.

The debate over Stanjura's proposed changes to VAT rates is ongoing, and it remains to be seen how it will be resolved within the government coalition and in the wider public discourse.